 A very good evening aspirants, welcome to Hindu News Analysis brought to you by Shankar I.S. Academy. Today is 16th of April 2022. Before starting, we are happy to announce Shankar I.S. Academy is conducting a free All India Problems Mark Test. These mark tests will be conducted across 13 centres both in online and offline mode. As you can see, the mark test starts on 15th of May 2022. I kindly request the viewers to register for the mark test and use this wonderful opportunity. The registration link for the mark test is given in the description. You can make use of it. These are the list of topics we are going to discuss today. As you can see, the first two topics is regarding economic crisis in Sri Lanka. The first topic which is editorial, we will discuss about the consequence of the measures taken by Sri Lanka to address the sovereign debt crisis. See here, these two articles are somewhat related. You will know that in our discussion. And the Sri Lankan crisis has been in use paper every day that you know. So in this year preliminary examination, we can expect a question from this area. And regarding the third topic, here we will discuss about the reserve norms in India, that is CRR and SLR. And this fourth topic, we will discuss about S 400 and CATSA. And in this fifth topic, we will learn about Cyclopean war. And then we will conclude our discussion by solving some of the preliminary practice questions. Now let's get into our discussion. Friends, look at this editorial. This editorial article is again about the ongoing economic crisis in Sri Lanka. Yesterday, we saw that Sri Lanka has announced to default on its sovereign debt. We also saw the reasons behind it. But in this editorial, author has talked about the consequences of the default or the measures taken to address the crisis. According to the author, these measures are further going to aggravate the crisis. So in this discussion, let us see what are these measures and we will also analyze the possible impacts of those measures. Before that, the syllabus relevant to this editorial is highlighted here for your reference. You can go through it. First, let us see the consequences of the sovereign default. Sovereign default means a nation has failed to repay its external debt. And the nation we are talking about is Sri Lanka. So the major consequence for Sri Lanka is this will damage Sri Lanka's impeccable record because it has never defaulted before. Now the second consequence is this will downgrade credit ratings of Sri Lanka government that international ratings agency gives. See, generally credit ratings refers to a quantified assessment of a borrower's credit worthiness. And it may also refer to a quantified assessment with respect to a particular debt or financial obligation. Note that the sovereign credit ratings applies to national government. The credit ratings help investors to understand the level of risk they face when buying a financial instrument in a country. Mainly, it gives investors insights into the level of risk associated with investing in the depth of a particular country. So, obtaining a good sovereign credit rating is essential for developing countries to assess funding in international bond markets. That means when the credit rating is low, like in the case of Sri Lanka, assessing international funding becomes very difficult. This is the third consequence. And such low credit rating makes international lenders reluctant to lend any more money to the Sri Lankan government. But the lenders may consider lending it if it is a part of a restructuring agreement. Here, we are talking about the sovereign debt restructuring. Sovereign debt restructuring is nothing but exchange of outstanding sovereign debt instruments such as loans or bonds for new debt instruments or cash. And all this is done through a formal process and it involves two elements. One is depth rescheduling and the other is debt reduction. See, depth rescheduling means lengthening the maturities of the old debt. That is, the maturity debt is further extended, that's it. Sometimes it also involves lowering the interest rates of the debt. So note here, the debt is not reduced, only the maturity date is extended or interest rates are reduced. Now, coming to the second element, it is debt reduction. Here, there will be a reduction in the face value of the old instrument. So, both these types of debt operations involve a haircut, that is, a loss in the present value of credit or claims. Now, when the restructuring occurs after default, it is known as post-default restructurings. Now, even if lenders agree to lend after sovereign debt restructuring, the cost of these fresh borrowing is likely to be high for Sri Lanka government. We cannot ignore the fact that this will further increase Sri Lanka sovereign debt. And finally, if no one is ready to provide funding, it will push the government to bankruptcy. These are the common consequences of a sovereign default. You may think, how IMF gets involved? See, when a country is in economic distress, we saw it may go for debt restructuring. But before that, if it is a member country of IMF, they approach IMF for financing. Here, the aim is to avoid restructuring and the associated economic, social and political disruption. And when they approach, IMF is required to make a judgment whether the member's debt burden is sustainable or not. This judgment determines the availability and the appropriate scale of IMF financing. Now, after the assessment of the debt, if IMF finds it to be sustainable, then it may provide the finance without a debt restructuring plan. On the other hand, if the debt is unsustainable, then debt restructuring becomes inevitable along with the finance. See, in the upcoming article, that is the article in the next discussion, we will see some of the facts about IMF. So, coming back to this editorial, Sri Lanka has sought the help of IMF. And IMF and Sri Lanka are negotiating a support package. So, it is clear that through IMF package, Sri Lanka will get few billion dollars in the short term. But the issue is, along with this comes a structural reform package that is the appropriate economic policy framework which is developed as part of getting the aid. Because, agreeing to implement structural reforms is a precondition for such aid from IMF. That is why author notes that defaults create a desperate reliance on the IMF which gives IMF all the power to unilaterally determine loan conditions. Now, the author is of the opinion that the impact of such structural reforms will be much higher and it will affect the working class more. So, let us see what these reforms are and its impacts. It is very important. See, the first reform is that these reforms will be neoliberal. That is the policies will promote free market capitalism deregulation and will cause reduction in government spending. The main reform will be the revenue based fiscal consolidation through increasing tax rates and energy pricing reforms. We know increasing tax rate will aggravate the economic agony of the poor. Further, energy price hikes for example the increased rates of petrol and cooking gas will directly affect consumers. And the second impact is the near term monetary policy tightening towards inflation targeting. We know that tightening of monetary policy will usually involve increasing interest rates. Higher interest rates means increase in the cost of borrowing and therefore reduction in government spending and investment. All this ultimately leads to lower economic growth. But this is in contrast to what is needed in Sri Lanka because Sri Lanka needs a boost in economic growth. And the third impact is the market determined and flexible exchange rate. Here, the exchange rate is floated that is it is allowed to fluctuate freely in accordance with supply and demand in the financial markets. So, it is not restrained by trade limits or government control. That means when our investor sentiment swings back and forth, it will drive exchange rate up and down. Thereby, it will affect everyone. Particularly, an exchange rate depreciation immediately results in imported goods and services becoming relatively more expensive. And when imports are more expensive, it reduces consumers purchasing power. In this way, it will affect consumers also. But these issues are controlled in a fixed exchange rate. And unfortunately, it is not what I am of suggest. Now fourth impact is the targeted social safety nets. See, social safety nets is a non-contributory cash transfers targeted in some way to the poor and vulnerable. It is focused on poverty alleviation and institutional reform. The problem with targeted social safety nets is that it is not flexible enough to increase coverage or benefits as needed. Targeted social safety nets may also mean cut in social spending for public goods and services. So, again, the poor is getting affected. And they are affected at a time when Sri Lanka is already at the verge of a food crisis. Next is reforming state-owned enterprises, which is nothing but privatizing state-owned enterprises. This may make public services unaffordable. Also, we can witness resistance to privatization by Sri Lankan citizens, which may escalate the protests. This will further drive away the tourists, thereby affecting the tourism sector more. So, these are the reforms and associated issues. And many of these issues are the reason for current economic crisis of Sri Lanka. So, Arthur worries that IMF reforms will further aggravate the crisis. Therefore, as a conclusion, Arthur suggests an additional measure. It is nothing but the imposition of a wealth tax on the rich or allied sections of Sri Lanka. Through this, Sri Lanka government will generate revenue and it will make allied to take part in alleviating the crisis. So, that's all regarding this editorial. Now, we will do a quick recap. In this editorial discussion, we have seen about sovereign default, which means a nation has failed to repay its external debt. Then we have discussed about the consequences of sovereign default for Sri Lanka. The first consequence is that it will damage Sri Lanka's impeccable record, because it has never defaulted before. Second, this will downgrade credit ratings of Sri Lanka government. And the next consequence is that even if lenders agree to lend after sovereign debt restructuring, the cost of these fresh borrowing is likely to be high for the Sri Lanka government. And finally, if no one is ready to provide funding, it will push the government to bankruptcy. And we have also seen that when a country is in economic distress, it may go for debt restructuring. But before that, if it is a member country of IMF, they approach IMF for financing. And IMF will not aid just like that, because agreeing to implement structural reform is a precondition for such aid from IMF. And what are these reforms? These reforms will be neoliberal, that is the policies will promote free market capitalism, deregulation and will cause reduction in government spending. And second is near-term monetary policy tightening towards inflation targeting. Now, the third reform is market-based and flexible exchange rate. And the fourth reform is a targeted social safety net. And the final reform is reforming state-owned enterprises, which is nothing but privatization. So, the author suggests to impose wealth tax on the rich or allied sections of Sri Lanka. Through this, Sri Lankan government will generate more revenue and it will make allied to take part in alleviating the crisis. So, these are very important points. Please make note of it. Now, we will move on to next news article discussion. Now, look at this news article. See, yesterday, Raja Ma'am discussed in detail about the Sri Lankan sovereign debt crisis. So, what is the sovereign debt crisis? A sovereign debt crisis occurs when a country is unable to pay its bills. As Ma'am mentioned yesterday, this is exactly what is happening in Sri Lanka. Sri Lanka has decided to default on its foreign debt totaling about 50 billion dollars. That is, Sri Lanka has decided to not repay its foreign debt totaling about 50 billion dollars. Now, what is the way out for Sri Lanka in this situation? You might have seen various news articles about India and China extending the line of credit to Sri Lanka. But note that India and China can only provide support. It cannot entirely help Sri Lanka. To help countries experiencing sovereign debt crisis, the world countries have created an organization. The organization is nothing but the IMF, that is the International Monetary Fund. So, the Sri Lankan Finance Minister is going to Washington DC to get the help of the IMF to manage the sovereign debt crisis. This is the crux of the news article. So, in this context, as prelims is nearing, let us revise the basics of IMF. Now, let us start the discussion. See, the origin of IMF can be traced back to Bretton Wood Conference in 1944. It came into operation on 27th December 1945. What is the other institution that was established through the Bretton Wood Conference in 1944? It is the International Bank for Reconstruction and Development. Now, coming back, the IMF presently has 190 members. Its headquarters is located in Washington DC. See, these are some basic information about the IMF. Having seen this, now let us come to its objectives. See, the primary mission of the IMF is to ensure the stability of the international monetary system. And apart from this, it also aims to accomplish a number of different goals, like reducing global poverty, encouraging international trade, and also to promote financial stability and economic growth. Having seen its objectives, now let us see how the IMF functions to achieve its objectives. Note that the IMF functions in three main areas. The first function is to oversee the economies of member countries. As we saw earlier, its primary aim is to promote stability in the global monetary system. So, its first function is to monitor the economies of its 190 member countries. And this activity is known as economic surveillance. And it happens at both national and global levels. Now, second comes the lending to countries with balance of payment issues. Note that instead of lending to fund individual projects, the IMF lends money to member countries with balance of payment problems. And this assistance replenishes international reserves, stabilizes currencies, and strengthens conditions for economic growth. See, Sri Lanka's present sovereign debt crisis was preceded by its balance of payment crisis. But at that time, Sri Lanka did not avail the help of the IMF. They thought they could manage the crisis. Now, why was Sri Lanka reluctant to seek IMF help? It was reluctant because when seeking the help, the IMF will propose various reforms on austerity measures. Sri Lanka was not in a position to follow austerity measures as poverty in Sri Lanka has already risen due to pandemic. But now, as the balance of payment crisis has turned into a sovereign debt crisis, Sri Lanka has no other choice but to get help from the IMF. Now, coming back, let us see the final function of the IMF. The third and final function of the IMF is to help the member countries to modernize their economies. And this is achieved through the capacity development, which is done by providing assistance, policy advice, and training through its various programs. Usually, it provides the member countries with technical assistance in areas of physical policy, monetary policy, and exchange rate policies, banking and financial system supervision, regulation and statistics. See, these are the important functions of the IMF. I hope now you have a basic understanding of the role played by the IMF. With this, let us conclude this discussion. Now, let us do a quick recap. What have we seen so far? We have seen that the origin of IMF can be traced back to Bretton Wood Conference 1944. IMF presently has 190 members and its headquarters is located in Washington DC. Then we saw that the primary mission of the IMF is to ensure the stability of the international monetary system. And we have seen three important functions. The first function is to oversee the economies of member countries. And second function is the lending to member countries with balance of payments issues. And the third function of IMF is to help the member countries to modernize their economies. That's all regarding this news article. Now, we will move on to next news article discussion. Now, look at this news article. This article says that China is cutting down its RRR. So, what is RRR? Here, RRR is not Rodram-Ranam-Rudram. It is actually reserve requirement ratio. And reserve requirement ratio is nothing but the portion of liabilities that commercial banks must hold on to rather than lend out or invest. So, the reserve requirement ratio of China is similar to the cash reserve ratio of India. Now, why is China cutting down its reserve requirement? Actually, the Chinese economy is showing early signs of recession. So, to prevent the economy from facing a recession, money supply must be increased. One way of increasing money supply in the economy is by reducing the reserve requirement. If the reserve requirement is reduced, banks will lend more and the money supply will be increased. So, this is why China is cutting down its reserve requirement ratio. This is the crux of this article. In this context, let us revise about CRR and SLR. First, what is CRR? See, CRR or cash reserve ratio is a part of RBI quantitative monetary policy tools. As the name suggests, banks in India are required to hold a certain proportion of their total deposits with RBI in cash form. This is called the cash reserve ratio. The CRR must be maintained as a percentage of the net demand and time liabilities. Now, what is this net demand and time liabilities? See, demand liabilities include all liabilities which are payable on demand by the bank. That means it includes savings bank deposits, current account deposits, demand drafts and other unclaimed deposits. And time liabilities are those which are not payable on demand. It includes fixed deposits, cash certificates, cumulative and recurring deposits. The sum of the demand liabilities and time liabilities is called the net demand and time liabilities. Note that the present CRR is 4% that is banks must maintain 4% of the total NDTL as CRR. Now, who must maintain CRR? See, every scheduled bank, small finance bank and a payment bank shall maintain CRR with the RBI. And here are a few points you must note. CRR must be maintained in cash form, banks must maintain CRR with the RBI and RBI will not pay any interest for maintaining that CRR. One additional information here, while every scheduled banks must maintain CRR with the reserve bank, cooperative banks and local area banks must maintain CRR in cash form with itself instead of RBI. That is all about CRR. Now, let us move to SLR. See, SLR or statutory liquidity ratio refers to the percentage of the aggregate deposits that commercial banks have to invest in liquid assets. Here also, SLR is maintained as a percentage of net demand and time liabilities that is NDTL. Now, the difference between CRR and SLR is that while CRR must be maintained only in cash form, SLR can be maintained in cash form, gold and government approved securities. Here, the government approved securities in India include dated securities of government of India, which are nothing but GSX, Treasury Bill and State Developmental Loan. Now, the next difference is that while banks do not earn any interest for maintaining CRR, they earn returns for maintaining SLR. Now, the third difference is that while CRR must be maintained with the RBI, the SLR is maintained with themselves. Now, who should maintain SLR? Every scheduled commercial banks including RRBs, local area banks, small finance banks, payment bank, primary cooperative bank, state cooperative bank and district cooperative bank shall maintain SLR. Note that the present SLR rate in India is 18 percentage. So, that's all regarding CRR and SLR. We have seen that CRR must be maintained in cash form and it must be maintained with RBI and RBI will not pay any interest for maintaining CRR. Now, coming to SLR, SLR can be maintained in cash form, gold and government approved securities. And the banks can maintain SLR with themselves. And for maintaining SLR, banks earn some returns. The present CRR is 4 percentage and present SLR rate in India is 18 percentage. So, that's all regarding this news article. Now, we will move on to next news article discussion. Now, look at this news article. This news article is about S-400 and CATSA. First, we will see a little bit of background. In October 2018, India and Russia signed a $5.43 billion deal. According to this deal, India contracted Russia for the delivery of five S-400 systems. Last December, India took delivery of the first S-400. The delivery of the second unit is delayed due to Russia-Ukraine issue. This is the crux of the news article. In this context, let us revise about the S-400 system. See, S-400 is one of the world's most advanced air defense system. First, it is a surface-to-air missile system. Secondly, each S-400 system has four different types of missiles with a range of up to 40 kilometers, 120 kilometers, 250 kilometers and 400 kilometers. And it has an altitude range of up to 30 kilometers. Due to this capability, the S-400 system can tackle any aerial target within a range of 400 kilometers. In addition to this, it can simultaneously engage 36 targets. Thirdly, the S-400 system can simultaneously track and neutralize a range of incoming objects like aircraft, missiles and unmanned aerial vehicles over a range of 400 kilometers. Fourthly, it has fire and forget capability. What does this mean? This means that it does not require further guidance after the launch of the missile. Using this system, targets that are outside the line of sight can also be neutralized. Finally, the S-400 system is highly flexible and it can be easily integrated into the air force, army and navy. Having revised about the basics, let us now see the working of the system. Look at this image here. Here, the long-range surveillance radar tracks objects like incoming missiles or aircrafts and relays the information to the command vehicle. The command vehicle assesses the potential targets. After the command vehicle identifies the target, it orders the missile launch. The launch data is sent to the launch vehicle and it releases surface to air missiles. See, the engagement radar plays a main role in the fire and forget capability of the S-400 system. It is the engagement radar that help guide missiles towards the target. This is about the working of the system. Since India signed this deal with Russia, the United States threatened India of using CATSA. Now, what is this CATSA? It is the short form for countering American adversaries through sanctions act. Know that it is a specifically enacted legislation of the USA. According to some sources, its ultimate goal is to prevent revenue from flowing to the Russian government. To achieve this aim, sanctions are imposed on countries that make significant transactions with Russia. But this term, significant transactions has not been defined by the legislation. However, the US government classified the purchase of the S-400 system as a significant transaction. So, the Indian purchase of S-400 system from Russia can invite sanctions. To avoid the sanctions, India and Russia had worked out payment through rupee-ruble exchange for this deal. See, rupee-ruble trade agreement is an alternative payment mechanism to settle dues in rupees instead of dollars or euros. So, that is all regarding S-400 and CATSA. What have we seen so far? We have seen that S-400 is a surface-to-air missile system. And each S-400 system has four different types of missiles with a range of up to 40 kilometers, 120 kilometers, 250 kilometers and 400 kilometers. And the altitude range is up to 30 kilometers. We have also seen that it has fire and forget capability which does not require further guidance after the launch of the vehicle. Then we have seen about CATSA and its ultimate goal is to prevent revenue from flowing to the Russian government. To avoid the sanctions, India and Russia had worked out payments through rupee-ruble exchange for S-400 deal. So, that is all regarding this news article. Now we will move on to next news article discussion. Look at this news article. This news article mentions that Bihar government has sent a proposal to the Archaeological Survey of India to apply for UNESCO World Heritage Tag. This tag is demanded for the cyclopean wall in Bihar. So, let us see what is this cyclopean wall. As the name suggests, it is a wall. It is 40 kilometers long. It is situated in Rajgeer in Bihar. And it is one of the few important pre-Maurian stone structures to have been found. So, when and why it was built? It was built before 3rd century BC. And it was built to protect the ancient city of Rajgeer from invaders. The wall fortified the city. Know that the ancient city of Rajgeer was the capital city of King Bimbisara and his son Ajat Shatru. They were the two very powerful rulers of Magadha empire. And Rajagreha in Bihar was the capital of Magadha for several years. And we know that Rajagreha is now known as Rajgeer. And after Rajagreha, the capital was shifted to Pataliputra. We also know that the King Bimbisara and Ajat Shatru were contemporaries of the Buddha. And after hearing Buddha sermon, Bimbisara converted into the Buddhist order. Now, coming to the wall, it is built with massive undressed stones. These stones are fitted together. The wall is 14 inches wide and 40 kilometers long. But why the term cyclopean? See, this term refers to the masonry or stonework. It is a type of megalithic architecture. It denotes a type of ancient masonry made with massive irregular blocks. In this, the wall is constructed without mortar. Please note that mortar is nothing but a bonding agent, which is generally produced by mixing, cementing or binding materials with water. Okay, this technique was employed in fortifications and earlier times because it used large stones which reduce the number of joints and so it reduced the wall's potential weakness. These kinds of walls with cyclopean masonry could be found in Italy and Greece. And since the Rajgeer wall is similar to the ancient Greek walls, it is called cyclopean wall. Okay, now coming to its features. In the cyclopean wall in Rajgeer, bastions were built at intervals to strengthen the wall. Bastions are these projecting part of a fortification. And according to polytext, there were 32 large gates and 64 smaller ones to enter the fortified city. It is said that once the city gates were closed in the evening, no one, not even the king could gain entry into the city. Here note that the wall did not survive the ravages of time. But even today, a considerable part of the wall is still there. It exists along the Ratnagiri hill starting from the base of the hill towards the hillside. Now we will do a quick recap. Cyclopean wall was built before 3rd century BC and it was built to protect the ancient city of Rajgeer from invaders. It is built with massive undressed stones. These stones are fitted together and the wall is 14 inches wide and 40 kilometers long. The term cyclopean refers to the masonry or stonework. It is a type of megalithic architecture. It denotes a type of ancient masonry made with massive irregular blocks. And this, the wall is constructed without mortar. This technique was employed in fortifications in earlier times because it used large stones. This reduced the number of joints and thus reduced the wall's potential weakness. So that's all regarding this news article. Now we will move on to the next part of our news article discussion which is nothing but preliminary practice questions discussion. Now look at the first question. Consider the following statements about the ancient city of Rajagraha. First statement, it was the capital of Magadha empire. And statement 2, a cyclopean wall fortified the city. And statement 3, it is equally revered by the Buddhist and the Jains. And you have to find the correct statements. See, regarding statement 1 and 2, we have seen this in our discussion right. So both are correct. Rajagraha was the capital of Magadha empire and cyclopean wall fortified the city. And statement 3, it is also correct. Because Rajagir was also considered one of the places favored by spiritual leaders like Lord Mahavira and Gautama Buddha. Therefore, Rajagir is a major hub for pilgrims of both the Jain and Buddhist faiths. So our answer here is option D, 1, 2 and 3. Now look at the second question. Consider the following statements about LAF, that is liquidity adjustment facility. Statement 1, it is a tool used by RBI to control short-term money supply. And statement 2, 1998 Narasimha committee recommended the creation of LAF. And statement 3, components of liquidity adjustment facility are repo and reverse repo. You have to find the correct statements. See here also, all the statements are correct. Yes, LAF is a tool used by RBI to control short-term money supply. And there are two components of LAF, they are repo and reverse repo. Here, repo is the rate RBI charges on its clients for short-term loans. And reverse repo is the interest rate paid by RBI to its clients for short-term loans. And also note that 1998 Narasimha committee recommended the creation of LAF. So here, all the statements are correct. So our final answer here is option D, all the above. Now look at this third question. Which of the following given pairs are correctly matched? Here the range is given and on the other side, different system is given. See here, only the first pair is correctly matched. Because the Indian Ballistic Missile Defense Program is of long-range interception. And we have seen that S 400 is of intermediate interception. And Akash Air Defense and similar systems is of short-range interception. And know that man-portable air defense systems which is called man-pads and anti-aircraft guns are very short-range interception. So here, only the pair one is correctly matched. So our answer here is option A, one only. Now look at our last question. This is a quiz question for you. See, questions related to the reports are often asked in the preliminary examination. So take it as a homework and find the answer, post it in the comment section. It will be highly helpful for you. If you find time, please revise all the reports published by IMF. Okay. See the main question is displayed here. Write your answer and post it in the comment section. If you like the video, hit the like button, post your comments and share the video with your friends. And don't forget to subscribe Shankar IAS Academy YouTube channel. Thanks for watching.